The Spanish banking sector has gone almost three years without major mergers, after the integrations of Unicaja and Liberbank and Caixabank and Bankia. Years of relative tranquility, marked by rising interest rates, which have allowed banks to post record profits quarter after quarter.

Now, almost halfway through 2024, BBVA and Sabadell are once again sitting down to negotiate a merger that they already considered in the middle of the pandemic and that, in the end, did not materialize. On one side of the table, the bank chaired by Carlos Torres, with Onur Genç as CEO. On the other, headed by Josep Oliu, with César González-Bueno as CEO.

We analyze the keys to this corporate movement that, if it comes to fruition, will once again change the banking landscape in Spain.

What do we know so far?

At the moment, not much, except that they are going to sit down and talk. The two banks informed the National Securities Market Commission (CNMV), at noon on Tuesday, that a dialogue period was opening, and it is not known how long it will last. The merger proposal came from BBVA, which has conveyed to its rival its “interest” in “exploring a possible merger.” An invitation to which Banco Sabadell responded by opening the door. Its board of directors “will adequately analyze all aspects of the proposal,” he assumed.

From the outset it is not a negotiation between equals. BBVA's stock market value is around 60 billion euros, despite the fact that investors have punished the stock after learning of the merger negotiations. On the other hand, Sabadell is slightly above 10,000 million. BBVA generates most of its business outside of Spain. In the case of Sabadell it is the opposite. As an example, in the first quarter of the year, the bank headed by Carlos Torres earned 2.2 billion euros. Of them, 725 million correspond to their country of origin. On the other hand, in the case of Sabadell, of the 308 million euros that he earned in the first three months of the year, 263 million were contributed by Spain.

This Wednesday, BBVA proposed to Sabadell an exchange of one of its shares for 4.83 shares of the Catalan bank, assuming that no distributions of dividends, reserves or any other distributions would be made by any of the companies to their respective shareholders. BBVA has communicated to the National Securities Market Commission (CNMV) the letter sent to the board of directors of Sabadell in which it includes the proposal for the potential operation.

What has the Government said?

After the announcement, the political reactions. The Minister of Economy, Commerce and Business, Carlos Body, is cautious because he believes that we must wait to see if the negotiations “bear fruit or not” and under what terms. “Not only must we establish and encourage the sector to continue to have these good levels of profitability and solvency,” but it is also “important” that the financial sector has “a competitive situation” and that it will be the National Commission of Markets and the Competition (CNMC) which “will ensure that this is the case.”

On the other hand, Yolanda Díaz has shown her opposition to the possible merger between the BBVA and Sabadell banks. The second vice president said in an interview on Cadena SER this Wednesday that banking concentration is “a systemic risk” and she has assured that she will discuss this issue with her government partner privately. The spokesman for Economy and Finance of the Sumar parliamentary group, Carlos Martín Urriza, considers that the “CNMC and the Ministry of Economy must prevent this merger” because “there is a lot of evidence of the worsening of the banking service and the increase in its price as a result.” of the high concentration,” he noted on the social network X. He also cited the lower remuneration of deposits in Spain compared to other European markets as a point against a possible operation. “This merger also increases the systemic risk for the taxpayer suffered by the least capitalized banks in the entire eurozone,” he explained.

The president of the Valencian Generalitat, Carlos Mazón, has also expressed his opinion, who has been “cautious” about a possible merger, although he has already offered that the headquarters of a future entity be in Alicante, where Sabadell is located, after its march of Catalonia in 2017.

Why did previous negotiations fail?

Nor is it that the dialogue between the two banks starts from scratch, because BBVA and Sabadell already considered the merger in the middle of the pandemic, in 2020. When they broke up, they justified that it did not come to fruition because they did not agree on the exchange of shares. Specifically, it was justified that Sabadell was asking for a price of 0.50 euros per share – almost 20% more than what it was then worth on the stock market – which entailed a price of almost 2.5 billion euros. Now, its share is around 1.80 euros.

“In the last four years, Banco Sabadell shares have multiplied approximately five-fold and have risen around 60% so far this year,” says Filippo Maria Alloatti, head of Financial Credit at Federated Hermes Limited, in his analysis. . “This makes the new acquisition attempt much more expensive.”

There are also internal differences, at the negotiating tables. Since 2021, Sabadell's first executive is César González-Bueno, who replaced Jaime Guardiola.

“At that time, BBVA wanted to take advantage of the bad situation that the Catalan entity was going through, which was accused of having an aging commercial network, lack of digitalization, a lot of exposure to SME credit and a British subsidiary in losses,” explains Joaquín Robles. , analyst at the firm XTB. “But since then the situation has changed a lot, the exposure to business credit has become a strength with the rise in interest margins, it has carried out several cost reduction programs and its British subsidiary is now profitable,” he adds in reference. to TSB.

Do interest rates have anything to do with it?

Yes, it has to do with it. The rise in rates in recent years has been the great driving force for banks to increase their margins and profit figures, even more so when Spanish entities are among those that pay the least for deposits in the entire eurozone. The declines are already on the horizon, although they are not as close as was thought nor will they be as many this year as was believed. And, if rates fall, banks' tools to maintain that profitability become smaller.

“As we slowly approach the first possible rate cuts from the European Central Bank and the Bank of England, consolidation across the sector will gain prominence. Two mergers and acquisitions have already been announced in the United Kingdom: Virgin Money and Nationwide, and Coventry Building Society and The Co-operative Bank,” lists Filippo Maria Alloatti.

“Banks have seen how the rise in interest rates has allowed them to significantly increase their profits,” Joaquín Robles points out in his analysis. “Given the difficulty of growing both organically and organically, most entities have chosen to provide value to shareholders through dividend payments or share repurchase programs.” Now, another way to give it value would be, through integration, with the internal reorganization and restructuring that this entails.

How would the banking landscape be with another merger?

It would be a sum and goes on. After the merger of Caixabank and Bankia, 70% of the banking business passed into the hands of five large entities. A concentration that has led to a restructuring of the commercial network and fewer branches.

It is obvious that the business is in fewer hands. Already before this possible operation, the concentration of recent years has meant that only four entities manage two thirds of the deposits in Spain.

As has happened in other sectors, such as 'telcos' or energy companies, there are fewer and fewer operators. In banking, Spain has the second most concentrated financial sector after the 2008 crisis. The percentage of assets in the hands of the five large banks – Caixabank, Santander, Bankinter and the two that negotiate, BBVA and Sabadell – grew by more than 30 points in the 14 years following the financial crisis. Something that only Greece has surpassed.

“In this case, rather than a merger between equals, it seems that we are rather facing a takeover in which the big fish eats the small one,” says Ricardo Zion, professor at EAE Business School.

What will happen to the templates?

In all mergers, employment suffers, although all entities always say when they join that the impact will be minimized. In this case, Sabadell has nearly 14,000 people on staff in Spain; and BBVA, around 28,000.

“What is sought in this type of operations is to achieve synergies, which always end up resulting in the departure of employees,” says Ricardo Zion. “In the merger of Caixabank with Bankia we could see that there were around 6,000 employees who went to the ERE. In this case, looking at the figures, we could estimate that we are talking about about 4,000 employees affected,” he calculates. “Obviously there will be office closures and there will also be duplications in central services, for example, in Human Resources, Finance, Treasury,” he lists, “so it will lead to job loss.”

The unions are already beginning to take a position. CCOO claims that “in a context in which both entities have obtained record results and have remunerated shareholders excellently”, it is “essential” that if there is a merger “a labor agreement is articulated that protects working conditions and employment of the two templates, with clear objectives.” There it cites that there be “employment guarantees, voluntary departures if there are surpluses, preservation and improvement of salary and working conditions and a business project with future viability.” In addition, they remember that the banks are in the process of salary negotiation with the workforce, after the strike in mid-March that supported 75% of the workforce.

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